Path to quick profits no longer that easy for foreign companies

The slow economic recovery in the United States and the continuing debt crisis in Europe have forced many multinational companies to pin their hopes on China, as the nation offers prospects of continuous and steady growth.

However, many of the foreign firms admit that it is not easy to make money in the Chinese market, as they face considerable challenges and competition from local enterprises.

Notwithstanding this, it is not easy to say that foreign companies are losing their advantages in the Chinese market or domestic players are gaining more advantages.

When China started its reform and opening-up, it offered several preferential policies to multinational companies to attract more foreign investment.

Using their inherent advantages like abundant capital and advanced technologies, foreign companies reaped robust rewards in China's manufacturing sector.

It was clearly evident in those days that multinational firms enjoyed considerable advantages compared with the State-owned or private enterprises in China, which were still struggling to find their feet in a planned economy.

But that is no longer the case and China is not in the same situation it was some 30 years ago. Capital is abundant in China and most of the favorable tax policies for multinational firms have been scrapped. Foreign investment decisions in China are now taken carefully after weighing their impact on the local environment and on social responsibilities, rather than the contribution to GDP.

Several other factors like the renminbi appreciation and high labor costs have added to the woes of multinational firms. There is also the even bigger problem of talent shortage as there is a growing preference among the workforce for jobs at domestic enterprises.

In contrast, domestic enterprises have made significant strides in several aspects like management and technological innovation. They have also sufficiently built up their capital reserves over a period of time.

Many Chinese companies have also spread their wings abroad to imbibe advanced management skills. They have also made considerable investments in research and development centers.

In other words, domestic companies are now using the market experience gained in international markets to good use in China, thereby enhancing their competitiveness. The advent of new technologies and scientific breakthroughs has also queered the path for foreign firms to make huge profits in China.

All of these have prompted several multinational companies to change their business strategies.

Take for example the business strategy of Dow Chemical Corporation in China, which had three distinct development phases. During the first phase, Dow focused largely on bringing overseas products to China and providing services for branches of other international clients in China.

In the second phase, Dow started recruiting more local talent and adding local clients. Along with this, it also made significant investments for a manufacturing base in China. The third and last phase saw Dow making more investments in R&D centers and factories in China as part of its mission to localize operations with more local resources and talent.

To understand the Dow journey, it is necessary to understand the underlying factors. The multinational company had in the beginning considerable advantages in technology and customer relationship, compared with domestic companies. But soon it realized that it had shortcomings in language, culture and information about local clients when it started the localization drive.

It is obvious that the golden period for foreign enterprises to make huge profits in China with small costs no longer exists. Multinational firms must realize that if they want to continue winning in the Chinese market, they need to constantly improve their market outreach and quickly adapt to the different market conditions.

Shen Lei is a postdoctoral fellow at the Renmin University of China. Hu Weiyi is the general manager of PICC Asset Management Co.

(China Daily 05/18/2012 page7)